California Income Tax Update

An estimated tax underpayment penalty will not be imposed against taxpayers who underpay their estimated California personal income taxes to the extent that the underpayment was created or increased as a result of the personal income tax rate increases just approved by the voters with the passage of Proposition 30. California law contains a safe-harbor provision for underpayments resulting from any provision of law that is chaptered during and operative for the taxable year of the underpayment. Taxpayers will not be required to make any catch-up payments.

Taxpayers should also be aware that the additional mental health tax imposed on taxpayers with taxable incomes above $1 million is not affected by Proposition 30, and taxpayers will still be liable for the additional 1% tax on taxable income above $1 million.

Finally, taxpayers should be aware that the tax imposed on nonresident individuals participating in composite returns filed by corporations and pass-through entities is imposed at the highest marginal tax rate, which is now 12.3% for the 2012—2018 tax years.

Sellers of California real property should note the impact of the increased tax rates on the alternative withholding rate, under which sellers may choose to compute the amount of withholding based on the reportable gain from the sale rather than on a percentage of the total sales price.

Individuals and non-California partnerships making the election must compute the withholding on the reportable gain using the highest marginal personal income tax rate, which has increased to 12.3%. Withholding on amounts paid by a partnership to its foreign partners, which is at the maximum personal income tax rate, is likewise affected.